Investors are dumping gold-backed exchange-traded products at the fastest pace since the securities were created a decade ago, mirroring the steepest price drop in 32 years. Holdings in the 14 biggest ETPs plunged 31 per cent to 1,813.7 metric tons since the start of January, the first annual decrease since the funds started trading in 2003. The removals erased $69.5 billion in the value of the assets as prices fell by the most since 1981.

ETP investments reached a record $148 billion last year, helping sustain the bull market that drove a more than sixfold increase in prices since 2001 by offering a way to own bullion without needing to store it. The slump shows some investors losing faith in gold as a preserver of wealth after inflation failed to accelerate and the Federal Reserve signaled it may curb stimulus. John Paulson, the biggest investor in the largest ETP, said last month he doesn't plan to buy more. "All the bullish factors we had pushing gold higher in the last 12 years are now going into reverse," said Robin Bhar, a London-based analyst at Societe Generale SA. "There will be more ETF selling in 2014 as the price goes lower."

Gold for immediate delivery fell into a bear market, defined as a drop of 20 per cent or more, in April and traded at $1,234.60 an ounce at 12:32 p.m. in Singapore, down 36 per cent from the September 2011 record of $1,921.15. Only corn and silver fell more this year among the 24 commodities tracked by the Standard and Poor’s GSCI Spot Index, which slipped 3.6 per cent. The MSCI All-Country World Index advanced 15 per cent and the Bloomberg Treasury Bond Index lost 2.8 per cent.

Goldman Sachs called bullion a “slam-dunk” sell in October and said it was among the bank’s most bearish commodity forecasts for next year. Bullion may average $1,216 in 2014, the least since 2009, according to the median of 14 analyst forecasts compiled by Bloomberg.

Investors see less need for “disaster insurance,” Fed Chairman Ben S. Bernanke told US lawmakers on July 18th. Traditionally, investors turn to gold in times of turmoil as an alternative store of wealth to equities and the dollar and as an inflation hedge. Until 2003, most held gold bars, coins or jewelry in vaults or bought futures and options. The introduction of gold-backed ETPs, which trade like equities, gave access to the metal without the need for arranging storage or dealing in derivatives. One futures contract traded on the Comex bourse in New York, equal to 100 ounces, costs $123,460 while a share in the SPDR Gold Trust, representing 0.1 ounce, is valued at $119.38.

“Gold ETPs are preferred by a lot of people because at the end of the day it’s easier to trade and easier to manage your portfolio,” said Francisco Blanch, the head of commodities research at Bank of America Corp. in New York. “And it’s probably cheaper. If you buy physical bars, you have the cost of the bar, but you also may have to pay for storage of the physical bar. The ETP does all of that for you.”

Bloomberg